In 2021 Tax Tips

Investing in property is a great way to build wealth, but managing your investment adds an extra level of difficulty. This article provides tax-smart tips for investing in Australian property and avoiding common pitfalls like negative gearing and capital gains taxes.

Investment Property Tax Deductions

If you’ve just bought an investment property or are looking to buy one, you need to understand the tax consequences, including which deductions you can claim. Here is H&R Block’s simple guide to how investment properties affect your tax return.

1.1 Rent

  • The income received is taxable to the property owners in the same proportion as the ownership interest as shown on the title.
  • The rent received must be at normal market rates to claim all the expenses in full. If you rent at below-market rent (to family or friends, perhaps), you can only claim deductions up to the amount of rent charged.
  • The rent must be declared in the year it is received.

1.2 Interest Claims

  • Interest paid on loan used to purchase the property is deductible, provided that all the money borrowed was used to purchase the property.
  • For accounts that are a line of credit and used privately, the interest claim needs to be apportioned for the private expenses.

1.3 Tax Deductions

  • Repairs

Repairs made to the property during the period it is leased deductible but generally not repairs carried out within the initial 12 months of owning the property (these can be used to reduce a capital gain on disposal).

  • Improvements

Improvements you make to the property are not deductible in full. Instead, they need to be depreciated and claimed over their useful life.

  • Other expenses can include
    • advertising for tenants
    • bank charges
    • body corporate fees
    • cleaning
    • council rates
    • electricity and gas
    • gardening
    • lawn mowing
    • in-house audio/video service charges
    • insurance
    • land tax
    • legal expenses releases etc.
    • lease costs
    • pest control
    • mortgage discharge expenses
    • property agent’s fees
    • quantity surveyor’s fees
    • security
    • stationery
    • postage
    • telephone
    • water charges
    • lenders mortgage insurance (usually written off over the shorter of the term of the loan or five years)

1.4 Building cost write off

If the building is under 25 years old, you will be entitled to claim a deduction of 2.5% per year of the original cost of construction of the building for up to 40 years from the original date of construction.

If you do not know the building cost, you can contract a quantity surveyor to determine the building costs, prepare the property’s depreciation schedules, and determine what can be claimed.

We recommend BMT Tax Depreciation, and their fee is discounted to $705 for H&R Block clients. The fee is tax-deductible. Would you please ask your Tax Consultant for contact information?

NOTE: A deduction cannot be claimed for the costs of acquiring or disposing of the rental property, except in the ACT, where properties are leasehold and stamp duty and legal expenses are allowable. Examples of expenses of this kind include the purchase cost of the property, conveyancing costs, advertising expenses, building inspection reports, travel to view the property before purchase and stamp duty on the transfer of the property. 

However, these costs may form part of the property’s cost base for capital gains tax purposes.

ATO cracking down on capital gains

Surging asset prices have also put capital gains in the spotlight, according to accounting firm H&R Block.

“Australians who have done well on the share market, with property or even with Bitcoin during the past year face being audited if they get their returns wrong,” H&R Block’s director of tax communication, Mark Chapman, said.

“Australians can face a 25% penalty for carelessly miscalculating how much they earned from shares, investment properties, and now cryptocurrency,” he said.

Working from home

According to the Australian Bureau of Statistics, working-related expenses will also be under heavy scrutiny, with two in five people still working from home at least once a day a week.

People lodging regular car and travel claims as well as significant working-from-home expenses will raise a red flag.

The ATO said what’s known as the temporary shortcut method is available to those claiming to work from home deductions this year.

Last year, the shortcut method was created at the height of the pandemic to deal with the surge in makeshift home workspaces. It allows claims at a rate of 80 cents per work hour at home, rather than complex calculations for specific items.

Mr Chapman said that’s not always the best method for workers.

“If you use the 80 cents per hour method, you can make no other claims about working from home. So, items like mobile phone and internet usage are included in the 80 cent rate,” he said.

“Your tax agent will be able to give you advise on which method to use.”

The biggest ‘no-go’ expenses while working from home

  • Personal expenses like coffee, tea and toilet paper;
  • Expenses related to your child’s education, such as online learning courses or laptops;
  • Large expenses up-front – any asset that costs more than $300 should be spread out over several years;
  • Employees generally can’t claim occupancy expenses such as rent, mortgage interest, property insurance, land taxes and rates. If you claim occupancy expenses, you may have to pay capital gains tax when you sell your home, even if it is your main residence.

Landlords impacted by rent reductions.

After a challenging year for landlords, the ATO said investors could continue to claim expenses as normal on properties that have faced rental reductions or mortgage holidays.

“You can continue to claim all those deductions, such as bank interest on the loan for the property, rates, all those sorts of things. 

Continue to deduct them as normal,” Mr O’Grady said.

Landlords only need to declare the rent as income once it is paid. So, for example, if payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.

“If your tenants haven’t paid for a couple of months, then in August, they give you three months’ worth of rent as a back payment. You report that income for that particular month,” Mr O’Grady said.

Key areas of focus for the ATO for EOFY 2021:

  • Capital gains from selling property, shares and cryptocurrencies;
  • Incorrect work-related expenses, such as claiming personal expenses or copying last year’s deductions despite changed work conditions;
  • Incorrectly claiming expenses for rental properties when they’ve been using the properties themselves;
  • They are failing to declare all income earned from short-term accommodation.

Tax tips for property investors

When claimed correctly, investors can recoup a considerable amount on their properties at tax time on costs like rental expenses, mortgage interest and legal fees.

Many investors can also overlook property depreciation.

According to BMT Tax Depreciation, 80% of property investors fail to take full advantage of property depreciation, potentially missing out on thousands of dollars.

Another significant deduction investors can claim it is the interest on their loan. However, there are some rules around this:

  • The property must have been rented out or genuinely available for rent in the same year you claim a deduction;
  • If the property was used for private purposes at any point over the year, you aren’t allowed to claim for that period;
  • If you use some of the loan money for personal use, such as buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.

Prove it with records

Income-tax-calculations

The ATO said the number one cause of disallowed claims is a lack of receipts or other documents to support a claim.

Remember, if you can’t prove it, you can’t claim it.

While no penalties will apply for taxpayers who amend their returns due to genuine mistakes, those who deliberately over-claim can face penalties of up to 75% of the claim.

The Ultimate Guide on Investment Property Tax Deductions – 20 Rental Deductions to Claim

Knowing about your investment property tax deductions will undoubtedly boost your tax return.

However, many investors miss out on expense claims because they aren’t equipped with the knowledge presented by the Australian Tax Office (ATO).

Seeing the full potential of all the tax breaks available to you could be the difference between you hoping to earn enough money from your investment property and having positive cash flow.

The following list will arm you with some useful tax tips on the best ways to maximise your investment property tax deductions.

What Rental Property Deductions Can you Claim?

1. Depreciation

Just as it is for vehicles, general wear and tear on your investment property are inevitable. The consequence of the wear and tear will affect the financial value of your property.

This is referred to as depreciation.

Luckily, for property investors, depreciation is a rental property deduction. It’s a non-cash investment property tax deduction that can be claimed over time and offset against your income.

Capital Works Depreciation (Division 40)

If your investment property commenced building after 16 September 1987, you could claim an investment property tax deduction on the building depreciation costs.

If you decide to renovate your investment property, the construction cost is also tax-deductible as a rental property deduction. However, unlike the maintenance expenses, the construction costs are not fully deductible in the same year you pay for them.

You can claim the costs in portions over several years. This is known as a Capital Works deduction. Similar to plant and equipment depreciation, this is a non-cash investment property tax deduction.

You can generally claim 2.5% of the construction cost per year from the time it was built, for 40 years.

Example:

Layla built a home on her investment property in 2001 for $400,000. As a result, she can claim an investment property tax deduction of $10,000 per year until 2041 due to the building’s depreciation.

Plant and Equipment Depreciation (Division 43)

You can similarly claim depreciation for wear and tear on any fixtures and fittings in the home.

Fixtures and fittings include things such as carpets, a cupboard, aircon, an oven, and showers, for example.

Quantity Surveyor Fees

To maximise the return on your investment, you should possibly seek the advice of a quantity surveyor.  They can help prepare a depreciation schedule for your investment property.

The bonus here is that the fees are an investment property tax deduction.

2. Loan Interest

This is the biggest investment property tax deduction you can claim.

If you had to take out a loan from the bank to purchase your investment property, you are entitled to claim any interest charged on loan as a rental property deduction.

Example 1:

Jane took out a loan of $420,000 to purchase an investment property. She rented out the property for one year, from 1 September 2019.

In that same year, she incurred $12,600 interest on her loan.

Jane’s interest is an investment property tax deduction because the loan was used for income-generating purposes.

If, however, part of the loan was used for private purposes, you won’t be able to claim interest on the total size of the loan, and instead, you can claim on the apportioned part of the loan used for income generation.

Example 2:

Sam took out a loan of $300,000. He used $285,000 to purchase his investment property and used the remaining $15,000 to pay for his European holiday.

Sam rented out his property for one year, from 1 November 2019. In the same year, he incurred a $25,000 interest expense on a loan.

Because part of the loan was used for private purposes, Sam won’t claim the entire interest expense amount as an investment property tax deduction.

He can do the following calculation to work out how much interest will be tax-deductible:

Total interest expense x (investment property loan amount ÷ total loan amount) = tax-deductible interest

$25,000 x ($285,000 ÷ $300,000) = $23,750

3. Rental Expenses

One way to generate income on your investment property is to rent it out. As a landlord, you are liable for all kinds of expenses that can be claimed as rental property deductions each year.

These expenses can be claimed in the same tax year that you paid for them.

Advertising Costs

Making use of advertising platforms to find tenants for your property is a tax-deductible expense.

Rental Agent Fees

Should you choose to appoint a property agent to manage the property and maintain a good relationship with your tenants, then they will be entitled to a fee that usually amounts to between 6% and 8%.

Having a rental agent can be an investment property tax deduction

Legal Expenses

You may wish to seek legal assistance when it comes to preparing the rental documents.

Or you may find yourself in a situation where you will need legal counsel to assist you in obtaining an eviction order. Legal counsel is an investment property tax deduction.

Council Rates

These expenses cover the cost of the rubbish collection and maintenance of the street on which your property is located.

You can claim this as an investment property tax deduction if you are paying the council rates and not the tenant.

Utilities

You can claim these expenses as an investment property tax deduction

If you are responsible for paying for the water, electricity, and gas.

If, however, you require the tenant to pay for the utilities, you can’t claim it as a rental property deduction.

Property Insurance

To protect your property and its contents, rental insurance is a no-brainer and a tax-deductible expense.

Repairs and Maintenance

Provided that the work done on the property maintains it and does not improve it, you can claim this as an investment property tax deduction.

Example:

Maintenance relates to repairing the wear and tear of the building. So, you may need to hire a professional to replace any broken roof tiles.

But if you decide to replace the carpets with wooden floors to improve the property and consequently increase its value, you can’t claim it against repair and maintenance costs.

Pest Control

Hiring a pest controller to rid the property of pests is an expense incurred whilst ensuring that your investment property continues to generate rental income.

So, it is a rental property deduction that you can claim as an immediate investment property tax deduction on your annual return.

Land Tax

Money-coins

As long as you have rented out the house on your property, you are entitled to claim the land tax as an investment property tax deduction.

*As each state has its regulations concerning land tax, consult a tax advisor to ensure you are submitting the correct claim in the right year.

Tax Advice

Should you decide to use a tax advisor to assist you in submitting your land tax claim, these fees are also considered immediately tax-deductible.

Cleaning

If your rental agreement with the tenant includes a weekly cleaning service, this would be an investment property tax deduction.

Similarly, the expense to have the house well cleaned after the tenant vacates the property is tax-deductible.

Image: Pixel-shot

Gardening Costs

The garden maintenance and replacement of plants and garden structures on your investment property is a claimable expense. However, any improvements to the landscaping that will increase the property’s value will not be claimable under gardening expenses.

Body Corporate Fees

if your investment property is a unit or is a townhouse, you will need to pay body corporate fees. This fee covers building insurance and the maintenance of shared areas.

It is an investment property tax deduction if you (not the tenant) pay it.

Stationery, Phone, and Internet Costs

Renting out your investment property is similar to managing a business.

Any stationery, phone, and internet usage can be claimed as an investment property tax deduction if they relate to the management of your investment property.

Bank Charges

Any bank fees charged on loans used to purchase the investment property are tax-deductible.

Accountant Costs

The fact that accounting fees are tax-deductible is a good incentive to have an accountant manage your tax returns and find ways to maximise your tax return.

4. Capital Gains Tax (CGT)

If you sell your investment property within 12 months of owning it,  you must pay CGT on the profit of that sale.

If, however, you own the house for more than 12 months before selling it, you are eligible for a 50% discount on your CGT. This means you will only need to include half of the capital gain in your tax return.

Please find out more on capital gains tax and how to reduce it here.

What can’t you claim on an investment property?

According to the ATO, expenses that aren’t considered to be investment property tax deductions include:

  • expenses incurred through the personal use of your investment property;
  • the repayments of the principal sum borrowed to purchase the investment property;
  • solicitor and conveyancer fees for the purchase or sale of the property;
  • other expenses incurred during the purchase or sale of the investment property; and
  • stamp duty fees charged on the transfer of property into your name.
  • Travel expenses to inspect your rental property yourself used to be claimable but, unfortunately, no longer can be claimed.

Key Takeaways

To maximise your tax return, make sure you use the ATO’s comprehensive list of claimable rental property deductions.

By arming yourself with this knowledge, you will be in the best position to take advantage of all the tax return opportunities available through your investment property.

Remember: you can’t claim any of the listed expenses as investment property tax deductions without proof. So make sure you always keep receipts, invoices, and any other documents relating to the expenditure of your income-generating investment property.

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